As the fallout from the demise of the Crocus Investment Fund continues to wash through Manitoba financial circles, the provincial government has quietly put a new tax measure in place, hoping to coax venture capital from the pockets of sophisticated investors.
The community development investment tax credit is designed to generate capital for small and early-stage companies in the province. But there’s a curious lack of hoopla surrounding its arrival.
Ken Cooper, managing director of the Winnipeg Angel Organization — a group of about 30 high net-worth professionals who evaluate investment proposals in a private, online format — says even after Premier Gary Doer’s cabinet passed the CDITC in December, it never issued a press release to unveil it to the world.
“Have you ever seen an economic initiative brought out by a government that keeps hiding it?” he says. “It’s dynamite that the government is doing it. I don’t know why it doesn’t want to brag about it.”
The CDITC, which was first announced in last spring’s provincial budget, is a 30% tax credit for investments of $20,000-$30,000 that are not RRSP-eligible. The tax credits offset provincial income tax payable, and unused credits can be carried forward for 10 years or back for three years.
Cooper believes it will be a “big help” to investors who want to look at private investment opportunities instead of public deals. He says the WAO has been pushing for the CDITC, which is very similar to a tax credit in British Columbia, for a couple of years.
“It levels the playing field,” Cooper says. “It’s so simple and inexpensive to invest in a public company. Investing in private and start-up companies isn’t only illiquid but it’s also expensive — with a lot of legal baggage that you don’t have when investing in a stock.”
Tax Credits
Jim Kilgour, executive director of financial services for the government’s competitiveness training and trade department, says the tax credit will ideally help small and early-stage companies in Manitoba attract capital. Such companies are currently facing a void when it comes to this type of high-risk financing.
He says the government has budgeted $5 million in tax credits for 2008, which would mean almost $17 million would be invested in the sector. The B.C. program on which it is based has a budget of about $17 million.
Like it or not, similarities can’t help but be drawn between the CDITC and Crocus, which exploded more than three years ago amid serious concerns about the valuations of the companies in its portfolio. Crocus was the driving force in Manitoba’s venture-capital sector for a decade.
Since its collapse, however, the venture-capital market has fallen on hard times.
Last year, Crocus’s long-time competitor, the ENSIS Growth Fund, experienced net redemptions for the first time. Just a few years earlier, Crocus and ENSIS combined were regularly raising in excess of $50 million annually.
Kilgour denies the tax credit is in response to the collapse of labour-sponsored Crocus but, he admits, the failure has “exacerbated” an already tough problem for small businesses.
“Knowledgeable investors have so many places to put their money today,” he says. “It’s becoming easier to put it into the stock market. [The tax credit] is a tool that would get them to invest in early-stage companies. Equity investing is a difficult thing to do. It’s not any more difficult because of Crocus; it’s always been difficult.”
There are some significant differences between the CDITC and labour-sponsored funds as the latter have maximum investments of $5,000, which qualify for a 30% tax credit split evenly between the provincial and federal governments. “We’re going after knowledgeable high net-worth individuals who are the people who should be making these types of investments,” Kilgour says.
Cooper says there’s no doubt the CDITC’s characteristics will attract a different kind of investor than labour-sponsored funds. “Crocus and ENSIS raised money from people who wanted a tax credit first and couldn’t care less where the money was invested,” he says. “In this case, you have to find the opportunity, decide whether to invest in it — and then you get the tax credit.”
spearhead program
There’s always the encouragement of the tax credit but, Cooper says, “It’s not the main reason you make your investment.” Cooper hopes the federal government will get in on the act, as well, and spearhead a national program.
@page_break@In order to be eligible for the CDITC, a company must not have net and gross assets in excess of $10 million and $25 million, respectively. It must employ no more than 200 people, at least one-quarter of its total wages must be paid to Manitobans and at least 25% of its employees must reside in the province.
Enterprises that are professional practices or involve primary industries, mineral exploration, seasonal enterprises or commercial property developers are not eligible. IE
Manitoba quietly unveils new tax credits
- By: Geoff Kirbyson
- February 1, 2008 February 1, 2008
- 19:44